IMFS Working Papers

We study how heterogeneous attention to inflation across households affects the transmission of monetary policy. Using household-level surveys for the US and Australia, we first show that households’ attention to inflation varies across income levels. Specifically, we find that high-income households pay more attention to inflation than other income groups. To quantify the effects for the aggregate economy, we build a Heterogeneous Agent New Keynesian model with an endogenous attention choice where the level of attention to inflation varies along the income distribution. Compared to fully rational inflation expectations, we find that the economy faces a less severe recession after a monetary policy tightening when households’ expectations are stable. This result is driven by the misperceived fall in future real labor income of low-income households that incentivizes an increase in their labor supply. At the same time, in response to the tightening, low-earners
experience an even larger decrease in their welfare under inattention compared to the rational expectations case.

Payment costs for consumers are difficult to determine, are not recorded in an internationally harmonized manner and vary significantly from country to country. They are incurred in many forms, for example as fees for account management, for cash withdrawals at ATMs or for payment cards; but also as financial damage in the event of loss or fraud. On the other hand, this also includes time costs, e.g. for cash withdrawals or the payment process, and costs of data disclosure. To determine the total costs and for international comparisons, different key figures are calculated, such as the cost per transaction, as a percentage of the transaction value or relative to GDP. After clarifying the concept of costs, the focus of our paper is on a critical review of the literature on cost studies at the consumer level. In particular, the results of existing work are compared, the most important cost categories are identified and sensitivity analyses are carried out. We find some key cost drivers and show how the results are driven by key assumptions.

The standard approach to solving linear DSGE models is to apply the QZ method. It is a one-shot algorithm that leaves the researcher with little alternative than to seek a different algorithm should the result be numerically unsatisfactory. We develop an iterative implementation of QZ that delivers the standard result as its first iteration and further refinements at each subsequent iteration. We demonstrate that our algorithm successful corrects for accuracy losses identified in particular cases of a macro finance model and does not erroneously attempt to refine sufficiently accurate solutions.

We provide evidence for a new propagation mechanism of wealth inequality and mobility. Using unique administrative data and a quasifield experiment of exogenous assignment, we find that educated entrants, faced with greater local wealth inequality and salient cases of wealth mobility, take financial, real, and self-employment risks and reach higher positions in the wealth distribution, while the less educated do not. This is driven by poorer communities with more salient cases of wealth mobility, consistent with peer exposure rather than supply side effects. We find no evidence for other channels, such as obtaining higher-paying more secure jobs, relocating, or reducing debt.

(Revised version WP 16 / 2021)

Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric methods, and sample periods, and it is not explained by other firm characteristics. This evidence suggests that higher interest rates may not skew investment away from a sustainable transition.

The authors identify corporate commitments for reductions of greenhouse gas emissions—green pledges—from news articles using a large language model. About 8% of publicly traded U.S. companies have made green pledges, and these companies tend to be larger and browner than those without pledges. Announcements of green pledges significantly and persistently raise stock prices, consistent with reductions in the carbon premium. Firms that make green pledges subsequently reduce their CO2 emissions. The evidence suggests that green pledges are credible, have material new information for investors, and can reduce perceived transition risk.

Throughout its history, the Fed has operated with a muddled mandate that has not explicitly recognized price stability as the primary goal of monetary policy. The Fed’s success in maintaining price stability and fostering the good economic performance associated with it has depended on how it interpreted its mandate and implemented its policy strategy. In the 1970s and in the recent past, the Fed interpreted its mandate in an overambitious fashion, placing undue emphasis on the elusive goal of maximum employment. On both occasions, the Fed’s strategy proved insufficiently resilient, and high inflation followed. To improve its policy strategy the Fed ought to revert to earlier interpretations of its mandate that acknowledge the primacy of price stability as a policy guide.

The authors conduct a web-based experiment in which they elicit the recommendations of professional and lay advisors on the risky portfolio share of randomly assigned vignettes of investors. Both professionals and lay advisors respond to investor characteristics broadly in agreement with portfolio theory, but they are also influenced by their own characteristics and portfolios. Professionals tend to respond more than lay advisors to investor characteristics, but also to their own risk aversion and income. Allowing for unobserved heterogeneity and estimating the distribution of advice through Bayesian methods, they find that professionals tend to recommend more limited risk exposure to older college educated groups compared to their peers, while they recommend young, lower-educated individuals to include more stocks than what their peers and elders would recommend.

Findings from four recent projects on how neighbors, peers, financial advisors, and exogenous stressors affect wealth accumulation are presented in this paper. Having neighbors with college economics or business education promotes retirement saving. Greater local wealth inequality and mobility at the start of economic life motivate college graduates to take portfolio risks and achieve greater wealth, leaving others behind. Financial advice from unbiased professionals differs from peer advice in how it relates to advisor and advisee characteristics. Background stressors, such as crises, wars, and personal problems, occupy savers’ minds. In an incentivized online experiment, background cognitive load consistently dampened consumption and promoted saving.

The authors revisit the limited stock market participation puzzle leveraging a qualitative research approach that is commonly used in many social sciences, but much less so in finance or economics. They conduct in-depth interviews of stock market participants and non-participants in Germany, a high-income country with a low stock market participation rate. Differently from a survey using preset questions based on theory, They elicit views in an open-ended discussion, which starts with a general question about “money”, is not flagged as regarding stock market participation, and allows for probing and follow-up questions. Many of the factors proposed by the literature are mentioned by interviewees. However, non-investors perceive surprisingly high entry and participation costs due to a fundamental misunderstanding of the potential for selecting “good” stocks and avoiding “bad” ones and for market timing through frequent trading.

Surprisingly, the investors they interview often share these views. However, they find a way to overcome these costs with the help of family, friends, or financial advisors they trust. While the insights from the qualitative interviews are based on a small number of interviewees, they find consistent evidence in a population-wide survey of investors and non-investors.

The authors investigate the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank (ECB). They focuse on versions of the Taylor (1993) and Orphanides and Wieland (OW) (2013) rules. Rules that respond to recent outcomes of HICP Core or domestic inflation data called for raising interest rates in 2021 and well ahead of the rate increases implemented by the ECB. Thus, such simple outcome-based policy rules deserve more attention in the ECB’s monetary policy strategy. Interestingly, the rules support the recent shift of the ECB to policy easing. Yet, they add a note of caution by suggesting that policy rates should not decline as fast as apparently anticipated by traded derivative-based interest rate forecasts.

Am 4. September 2024 vollendet Professor Dr. Helmut Schlesinger sein 100. Lebensjahr. Von 1991 bis 1993 bekleidete er das Amt des Präsidenten der Deutschen Bundesbank. Zuvor war er in verschiedenen Positionen für die Bank tätig, unter anderem als langjähriger Vizepräsident (von 1980 bis 1991) sowie als Leiter der Hauptabteilung Volkswirtschaft und Statistik. Das Jubiläum bietet Anlass, sein Lebenswerk zu beschreiben und zu würdigen. Für ehemalige Mitarbeiter war Helmut Schlesinger ein großes Vorbild und eine Quelle des Ansporns in vielerlei Hinsicht. Insbesondere vier Bereiche seiner Tätigkeiten haben die Arbeit seiner Mitarbeiter maßgeblich geprägt: Erstens seine Fähigkeit, ökonomisches Denken als eine Synthese aus Analyse und Statistik zu begreifen, zu vermitteln und zu organisieren, zweitens sein Verdienst, eine Stabilitätskultur in leitenden Positionen mitgeschaffen und bewahrt zu haben, drittens sein ordnungspolitisches Credo zur Preisstabilität und zur Unabhängigkeit der Zentralbank sowie viertens seine klaren Vorstellungen zu den Bedingungen einer erfolgreichen Europäischen Wirtschafts- und Währungsunion.

Im Folgenden soll ein Überblick über diese vier Schwerpunkte seiner Schaffensbilanz gegeben werden. In diesem Kontext ist insbesondere Schlesingers entscheidende Rolle bei der Schaffung der deutsch-deutschen Währungsunion 1990 sowie beim langjährigen Entstehungsprozess des Eurosystems und der Europäischen Zentralbank hervorzuheben. In der deutschen Bevölkerung, aber auch international hoch geachtet, wurde Helmut Schlesinger oft als die "Seele der Bundesbank" bezeichnet.

The author provides a solution method in the frequency domain for multivariate linear rational expectations models. The method works with the generalized Schur decomposition, providing a numerical implementation of the underlying analytic function solution methods suitable for standard DSGE estimation and analysis procedures. This approach generalizes the time-domain restriction of autoregressive-moving average exogenous driving forces to arbitrary covariance stationary processes. Applied to the standard New Keynesian model, the author finds that a Bayesian analysis favors a single parameter log harmonic function of the lag operator over the usual AR(1) assumption as it generates humped shaped autocorrelation patterns more consistent with the data.

The authors use a structural VAR model to study the German natural gas market and investigate the impact of the 2022 Russian supply stop on the German economy. Combining conventional and narrative sign restrictions, they find that gas supply and demand shocks have large and persistent price effects, while output effects tend to be moderate. The 2022 natural gas price spike was driven by adverse supply shocks and positive storage demand shocks, as Germany filled its inventories before the winter. Counterfactual simulations of an embargo on natural gas imports from Russia indicate similar positive price and negative output effects compared to what they observe in the data.

The author contributes a multivariate forecasting comparison between structural models and Machine-Learning-based tools. Specifically, a fully connected feed forward nonlinear autoregressive neural network (ANN) is contrasted to a well established dynamic stochastic general equilibrium (DSGE) model, a Bayesian vector autoregression (BVAR) using optimized priors as well as Greenbook and SPF forecasts. Model estimation and forecasting is based on an expanding window scheme using quarterly U.S. real-time data (1964Q2:2020Q3) for 8 macroeconomic time series (GDP, inflation, federal funds rate, spread, consumption, investment, wage, hours worked), allowing for up to 8 quarter ahead forecasts.

The results show that the BVAR improves forecasts compared to the DSGE model, however there is evidence for an overall improvement of predictions when relying on ANN, or including them in a weighted average. Especially, ANNbased inflation forecasts improve other predictions by up to 50%. These results indicate that nonlinear data-driven ANNs are a useful method when it comes to macroeconomic forecasting.

Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. The author introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects.

Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated.

The author creates an alternative version of the present utility value formula to explicitly show that every store-of-value in the economy bears utility-interest (non-pecuniary income) for its holder regardless of possible interest earnings from financial markets. In addition, he generalizes the well-known welfare measures of consumer and producer surplus as present value concepts and apply them not only for the production and usage of consumer goods and durables but also for money and other financial assets. This helps, inter alia, to formalize the circumstances under which even a producer of legal tender might become insolvent. The author also develops a new measure of seigniorage and demonstrates why the well-established concept of monetary seigniorage is flawed. This framework also allows to formulate the conditions for liability-issued money such as inside money and financial instruments such as debt certificates to become – somewhat paradoxically – net wealth of the society.

Die Autoren beschäftigen sich mit der Frage, ob die Schuldenbremse in ihrer jetzigen Form noch zeitgemäß ist oder ob sie modifiziert, reformiert oder gänzlich abgeschafft werden sollte. Zentral sind dabei Überlegungen, ob im Rahmen der Schuldenbremse „Zukunftsinvestitionen“ anders behandelt und breiter definiert werden sollten als „Investitionen“ im Sinne der Finanzstatistik und der Volkswirtschaftliche Gesamtrechnungen.

Zunächst geht es um die Frage der Tragfähigkeit der heutigen öffentlichen Finanzen in Deutschland und um deren Herausforderungen in den kommenden Jahren. Anschließend wird die Schuldenbremse in ihrer jetzigen Form vorgestellt sowie deren Wirksamkeit seit ihrer Einführung in Deutschland beschrieben. Weiterhin werden die in den letzten Monaten diskutierten Vorschläge zur Reform der Schuldenbremse vorgestellt und hinsichtlich ihrer Realisierbarkeit beschrieben. Eine Reihe dieser Vorschläge wird dann anhand von Simulationsrechnungen in sieben Szenarien untersucht. Dabei geht es um die Fragen, wie sich Lockerungen der Schuldenbremse längerfristig auf die Schuldenquote auswirken und wie sich der finanzielle Haushaltsspielraum des Staates im Zeitverlauf verändert.

Wie sich zeigt, hemmen die untersuchten Reformvorschläge den Schuldenabbau und verlagern die Lasten der Staatsverschuldung zunehmend auf die jüngeren Jahrgänge, die mit Niedrigzinsen, der demografischen Alterung und den Kosten der Dekarbonisierung ohnehin schon stärker belastet sein werden als ihre Elterngeneration.

The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future.

In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic. 

The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules’ prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed.

Despite a number of helpful changes, including the adoption of an inflation target, the Fed’s monetary policy strategy proved insufficiently resilient in recent years. While the Fed eased policy appropriately during the pandemic, it fell behind the curve during the post-pandemic recovery. During 2021, the Fed kept easing policy while the inflation outlook was deteriorating and the economy was growing considerably faster than the economy’s natural growth rate—the sum of the Fed’s 2% inflation goal and the growth rate of potential output. 

The resilience of the Fed’s monetary policy strategy could be enhanced, and such errors be avoided with guidance from a simple natural growth targeting rule that prescribes that the federal funds rate during each quarter be raised (cut) when projected nominal income growth exceeds (falls short) of the economy’s natural growth rate. An illustration with real-time data and forecasts since the early 1990s shows that Fed policy has not persistently deviated from this simple rule with the notable exception of the period coinciding with the Fed’s post-pandemic policy error.

Das Eurosystem und die Deutsche Bundesbank werden im Jahr 2023 und wahrscheinlich auch in den kommenden Jahren beträchtliche Verluste einfahren. Durch die massiven Wertpapierkäufe der letzten zehn Jahre, insbesondere von Staatsanleihen, sind die Überschussreserven der Banken stark gestiegen. Die daraus resultierenden hohen Zinszahlungen an die Banken seit der Wende in der Geldpolitik, bei zugleich geringer Verzinsung der hohen Wertpapierbestände, führten zu massiver Kritik. Die Banken machten dadurch „unfaire“ Gewinne, während der Fiskus auf die bisher üblichen Abführungen von Zentralbankgewinnen verzichten musste. 

Populistische Forderungen, die Gewinne der Banken zu begrenzen, indem z.B. die Mindestreservesätze im Eurosystem drastisch erhöht werden, um die Überschussreserven zu reduzieren, schaffen neue Probleme und sind weder sachlich gerechtfertigt noch hilfreich. Schließlich haben die EWU-Staaten aufgrund der ultra-expansiven Geldpolitik des Eurosystems sehr lange in beispielloser Weise von historisch niedrigen Zinsen profitiert und müssen nun die fiskalischen Folgen der massiven Ausweitung der Zentralbankbilanzen in der Phase der notwendigen geldpolitischen Normalisierung tragen.

In December 2017, during the One Planet Summit in Paris, a group of eight central banks and supervisory authorities launched the “Network for Greening the Financial Sector” (NGFS) to address challenges and risks posed by climate change to the global financial system. Until 06/2023, an additional 69 central banks from all around the world have joined the network. The authors find that the propensity to join the network can be described as a function in the country’s economic development e.g., GDP per capita, national institutions e.g., central bank independence, and performance of the central bank on its mandates e.g., price stability and output gap. 

Using an event study design to examine consequences of network expansions in capital markets, they document that a difference portfolio that is long in clean energy stocks and short in fossil fuel stocks benefits from an enlargement of the NGFS. 
Overall, their results suggest that an increasing number of central banks and supervisory authorities are concerned about climate change and willing to go beyond their traditional objectives, and that the capital market believes they will do so.

The complexities of geopolitical events, financial and fiscal crises, and the ebb and flow of personal life circumstances can weigh heavily on individuals’ minds as they make critical economic decisions. To investigate the impact of cognitive load on such decisions, the authors conducted an incentivized online experiment involving a representative sample of 2,000 French households.

The results revealed that exposure to a taxing and persistent cognitive load significantly reduced consumption, particularly for individuals under the threat of furlough, while simultaneously increasing their account balances, particularly for those not facing such employment uncertainty. These effects were not driven by supply constraints or a worsening of credit constraints. Instead, cognitive load primarily affected the optimality of the chosen policy rules and impaired the ability of the standard economic model to accurately predict consumption patterns, although this effect was less pronounced among college-educated subjects.

The authors investigate how unconventional monetary policy, via central banks' purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, they report two unintended side effects.

First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. They document an increase in real estate prices due to this policy, which fuels real estate overvaluation.

Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. They document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral.

Their findings suggest that central banks' quantitative easing has substantial adverse effects in credit-saturated economies.

Dictionary approaches are at the forefront of current techniques for quantifying central bank communication. In this paper, the author propose a novel language model that is able to capture subtleties of messages such as one of the most famous sentences in central bank communications when ECB President Mario Draghi stated that "within [its] mandate, the ECB is ready to do whatever it takes to preserve the euro".

The authors utilize a text corpus that is unparalleled in size and diversity in the central bank communication literature, as well as introduce a novel approach to text quantication from computational linguistics. This allows them to provide high-quality central bank-specific textual representations and demonstrate their applicability by developing an index that tracks deviations in the Fed's communication towards inflation targeting. Their findings indicate that these deviations in communication significantly impact monetary policy actions, substantially reducing the reaction towards inflation deviation in the US.

The author develops and implements a backward and forward error analysis of and condition numbers for the numerical stability of the solutions of linear dynamic stochastic general equilibrium (DSGE) models. Comparing seven different solution methods from the literature, he demonstrates an economically significant loss of accuracy specifically in standard, generalized Schur (or QZ) decomposition based solutions methods resulting from large backward errors in solving the associated matrix quadratic problem. This is illustrated in the monetary macro model of Smets and Wouters (2007) and two productionbased asset pricing models, a simple model of external habits with a readily available symbolic solution and the model of Jermann (1998) that lacks such a symbolic solution - QZ-based numerical solutions miss the equity premium by up to several annualized percentage points for parameterizations that either match the chosen calibration targets or are nearby to the parameterization in the literature. While the numerical solution methods from the literature failed to give any indication of these potential errors, easily implementable backward-error metrics and condition numbers are shown to successfully warn of such potential inaccuracies. The analysis is then performed for a database of roughly 100 DSGE models from the literature and a large set of draws from the model of Smets and Wouters (2007). While economically relevant errors do not appear pervasive from these latter applications, accuracies that differ by several orders of magnitude persist.

In his speech at the conference „The SNB and its Watchers“, Otmar Issing, member of the ECB Governing Council from its start in 1998 until 2006, takes a look back at more than twenty years of the conference series „The ECB and Its Watchers“. In June 1999, Issing established this format together with Axel Weber, then Director of the Center for Financial Studies, to discuss the monetary policy strategy of the newly founded central bank with a broad circle of participants, that is academics, bank economists and members of the media on a „neutral ground“. At the annual conference, the ECB and its representatives would play an active role and engage in a lively exchange of view with the other participants. Over the years, Volker Wieland took over as organizer of the conference series, which also was adopted by other central banks. In his contribution at the second conference „The SNB and its Watchers“, Issing summarizes the experience gained from over twenty years of the ECB Watchers Conference.

The author analyzes the macro-financial implications of using carbon prices to achieve ambitious greenhouse gas (GHG) emission reduction targets. His empirical evidence shows a 0.6% output loss and a rise of 0.3% in inflation in response to a 1% shock on carbon policy. Furthermore, he also observes financial instability and allocation effects between the clean and highly polluted energy sectors. To have a better prediction of medium and long-term impact, using a medium-large macro-financial DSGE model with environmental aspects, he shows the recessionary effect of an ambitious carbon price implementation to achieve climate targets, a 40% reduction in GHG emission causes a 0.7% output loss while reaching a zero-emission economy in 30 years causes a 2.6% output loss. He documents an amplified effect of the banking sector during the transition path. 

The study also uncovers the beneficial role of pre-announcements of carbon policies in mitigating inflation volatility by 0.2% at its peak, and the results suggest well-communicated carbon policies from authorities and investing to expand the green sector. His findings also stress the use of optimal green monetary and financial policies in mitigating the effects of transition risk and assisting the transition to a zero-emission world. 

Utilizing a heterogeneous approach with macroprudential tools, the author finds that optimal macroprudential tools can mitigate the output loss by 0.1% and investment loss by 1%. Importantly, his work highlights the use of capital flow management in the green transition when a global cooperative solution is challenging.

The author examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and its communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. 

The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forward-looking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook.

The authors present determinacy bounds on monetary policy in the sticky information model. They find that these bounds are more conservative here when the long run Phillips curve is vertical than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority’s concern for inflation. These determinacy bounds are obtained by appealing to frequency domain techniques that themselves provide novel interpretations of the Phillips curve.

In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. 

The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.

Climate change has become one of the most prominent concerns globally. In this paper, the authors study the transition risk of greenhouse gas emission reduction in structural environmental-macroeconomic DSGE models. First, they analyze the uncertainty in model prediction on the effect of unanticipated and pre-announced carbon price increases. Second, they conduct optimal model-robust policy in different settings. They find that reducing emissions by 40% causes 0.7% to 4% output loss with 2% on average. Pre-announcement of carbon prices affects the inflation dynamics significantly. The central bank should react slightly less to inflation and output growth during the transition risk. With optimal carbon price designs, it should react even less to inflation, and more to output growth.

The authors analyze the repercussions of different kinds of uncertainty on cash demand, including uncertainty of the digital infrastructures, confidence crises of the financial system, natural disasters, political uncertainties, and inflationary crises. Based on a comprehensive literature survey, theoretical considerations and complemented by case studies, they derive a classification scheme how cash holdings typically evolve in each of these types of uncertainty by separating between demand for domestic and international cash as well as between transaction and store of value balances. Hereby, they focus on the stabilizing macroeconomic properties of cash and recommend guidelines for cash supply by central banks and the banking system. Finally, they exemplify their analysis with five case studies from the developing world, namely Venezuela, Zimbabwe, Afghanistan, Iraq, and Libya.

Trotz der von der EZB eingeleiteten Zinswende in der zweiten Jahreshälfte 2022 als späte Reaktion auf die deutlich unterschätzte Persistenz hoher Inflationsraten im Euroraum sind die Realzinsen sowohl in der Ex-post-Betrachtung als auch in der Ex-ante-Betrachtung keineswegs als restriktiv einzuschätzen. Die Banken haben allerdings recht rasch strengere Vergaberichtlinien beschlossen, und die Nachfrage im Wohnungsbau und bei den Hypothekarkrediten ist stark eingebrochen.

Die Autoren thematisieren die Bedeutung von Zahlungsstromeffekten bei Annuitätenkrediten und analysiert hier vor allem den sogenannten Front-Loading-Effekt. Danach führen höhere Nominalzinsen selbst bei vollständig antizipierten Inflationsraten und unveränderten Realzinsen zu starken finanziellen Zusatzbelastungen in den ersten Phasen der typischerweise langen Kreditlaufzeit. Derartige Liquiditätseffekte können die Zahlungsfähigkeit bzw. die Zahlungsbereitschaft der privaten Investoren empfindlich verringern. Dies gilt vor allem bei Darlehen in Form der Prozentannuität, da hier zusätzlich ein Laufzeitenverkürzungseffekt auftritt. Solche Darlehen sind in Deutschland recht populär.

Mit Blick auf die Zukunft sehen die Autoren auch eine reale Gefahr für den Bestand an Wohnungsbaukrediten, wenn es zu einer Refinanzierung des großen Bestands an billigen Wohnungsbaukrediten kommt, ein Risiko, das auch Auswirkungen auf die makroökonomische und finanzielle Stabilität hat.

The authors assemble a data set of more that eight million German Twitter posts related to the war in Ukraine. Based on state-of-the-art methods of text analysis, they construct a daily index of uncertainty about the war as perceived by German Twitter. The approach also allows them to separate this index into uncertainty about sanctions against Russia, energy policy and other dimensions. They then estimate a VAR model with daily financial and macroeconomic data and identify an exogenous uncertainty shock.

The author has assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. He finds that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced.

He also finds that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.

The author presents and compares Bernoulli iterative approaches for solving linear DSGE models. The methods are compared using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium-scale New Keynesian model of Smets and Wouters (2007) iteratively. He finds that Bernoulli methods compare favorably in solving DSGE models to the QZ, providing similar accuracy as measured by the forward error of the solution at a comparable computation burden. The method can guarantee convergence to a particular, e.g., unique stable, solution and can be combined with other iterative methods, such as the Newton method, lending themselves especially to refining solutions.

In the IMFS Working Paper 147, Fabo, Jancoková, Kempf, and Pástor have shown that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek argue that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. The authors examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals such as the Journal of Monetary Economics, the Journal of Money, Credit and Banking, and the Applied Economics Letters, and their average number of citations is well over 200. Moreover, Fabo, Jancoková, Kempf, and Pástor show that these papers have supported policy communication by the world’s leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in the IMFS WP 147.

Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In their proposed approach, the authors take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, their results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.

(A former version of this paper is entitled: Robust frequency-based monetary policy rules)

Output gap revisions can be large even after many years. Real-time reliability tests might therefore be sensitive to the choice of the final output gap vintage that the real-time estimates are compared to. This is the case for the Federal Reserve’s output gap. When accounting for revisions in response to the global financial crisis in the final output gap, the improvement in real-time reliability since the mid-1990s is much smaller than found by Edge and Rudd (Review of Economics and Statistics, 2016, 98(4), 785-791). The negative bias of real-time estimates from the 1980s has disappeared, but the size of revisions continues to be as large as the output gap itself.

The authors systematically analyse how the realtime reliability assessment is affected through varying the final output gap vintage. They find that the largest changes are caused by output gap revisions after recessions. Economists revise their models in response to such events, leading to economically important revisions not only for the most recent years, but reaching back up to two decades. This might improve the understanding of past business cycle dynamics, but decreases the reliability of real-time output gaps ex post.

Highly interconnected global supply chains make countries vulnerable to supply chain disruptions. The authors estimate the macroeconomic effects of global supply chain shocks for the euro area. Their empirical model combines business cycle variables with data from international container trade.

Using a novel identification scheme, they augment conventional sign restrictions on the impulse responses by narrative information about three episodes: the Tohoku earthquake in 2011, the Suez Canal obstruction in 2021, and the Shanghai backlog in 2022. They show that a global supply chain shock causes a drop in euro area real economic activity and a strong increase in consumer prices. Over a horizon of one year, the global supply chain shock explains about 30% of inflation dynamics. They also use regional data on supply chain pressure to isolate shocks originating in China.

Their results show that supply chain disruptions originating in China are an important driver for unexpected movements in industrial production, while disruptions originating outside China are an especially important driver for the dynamics of consumer prices.

The author proposes a Differential-Independence Mixture Ensemble (DIME) sampler for the Bayesian estimation of macroeconomic models.It allows sampling from particularly challenging, high-dimensional black-box posterior distributions which may also be computationally expensive to evaluate. DIME is a “Swiss Army knife”, combining the advantages of a broad class of gradient-free global multi-start optimizers with the properties of a Monte Carlo Markov chain (MCMC). This includes fast burn-in and convergence absent any prior numerical optimization or initial guesses, good performance for multimodal distributions, a large number of chains (the “ensemble”) running in parallel, an endogenous proposal density generated from the state of the full ensemble, which respects the bounds of the prior distribution. The author shows that the number of parallel chains scales well with the number of necessary ensemble iterations.
DIME is used to estimate the medium-scale heterogeneous agent New Keynesian (“HANK”) model with liquid and illiquid assets, thereby for the first time allowing to also include the households’ preference parameters. The results mildly point towards a less accentuated role of household heterogeneity for the empirical macroeconomic dynamics.

The authors estimate perceptions about the Fed's monetary policy rule from panel data on professional forecasts of interest rates and macroeconomic conditions. The perceived dependence of the federal funds rate on economic conditions is time-varying and cyclical: high during tightening episodes but low during easings. Forecasters update their perceptions about the policy rule in response to monetary policy actions, measured by high-frequency interest rate surprises, suggesting that forecasters have imperfect information about the rule. The perceived rule impacts asset prices crucial for monetary policy transmission, driving how interest rates respond to macroeconomic news and explaining term premia in long-term interest rates.

The authors propose a new method to forecast macroeconomic variables that combines two existing approaches to mixed-frequency data in DSGE models. The first existing approach estimates the DSGE model in a quarterly frequency and uses higher frequency auxiliary data only for forecasting. The second method transforms a quarterly state space into a monthly frequency. Their algorithm combines the advantages of these two existing approaches.They compare the new method with the existing methods using simulated data and real-world data. With simulated data, the new method outperforms all other methods, including forecasts from the standard quarterly model. With real world data, incorporating auxiliary variables as in their method substantially decreases forecasting errors for recessions, but casting the model in a monthly frequency delivers better forecasts in normal times.

The authors present and compare Newton-based methods from the applied mathematics literature for solving the matrix quadratic that underlies the recursive solution of linear DSGE models. The methods are compared using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium-scale New Keynesian model of Smets and Wouters (2007) iteratively. They find that Newton-based methods compare favorably in solving DSGE models, providing higher accuracy as measured by the forward error of the solution at a comparable computation burden. The methods, however, suffer from their inability to guarantee convergence to a particular, e.g. unique stable, solution, but their iterative procedures lend themselves to refining solutions either from different methods or parameterizations.

Gegen den Landeshaushalt 2022 des Freistaats Thüringen bestehen nach Einschätzung von Helmut Siekmann erhebliche verfassungsrechtliche Bedenken. In einem Gutachten kommt Siekmann zu dem Schluss, dass sich die festgestellten globalen Minderausgaben im Vergleich zum gesamten Haushaltsvolumen nicht rechtfertigen lassen. Der verfassungsrechtlich gebotene Haushaltsausgleich sei nur dadurch erzielt worden, dass die eigentlich gebotenen Einzelkürzungen nicht vom Parlament entschieden, sondern der Exekutive überlassen worden seien. Durch Globale Minderausgaben soll der Ausgleich von Einnahmen und Ausgaben erreicht werden, ohne dafür erforderliche und politisch oft schwer durchsetzbare Kürzungen bei Einzeltiteln vornehmen zu müssen.

In Thüringen fehlen der Minderheitskoalition aus Linke, SPD und Grünen im Parlament vier Stimmen für eine eigene Mehrheit. Sie muss damit bei allen Entscheidungen eine Unterstützung der oppositionellen CDU aushandeln. Siekmann weist in seinem Gutachten darauf hin, dass die Veranschlagung von globalen Minderausgaben gleich welcher Art in keinem Fall die Exekutive ermächtigt, bestehende Verpflichtungen nicht zu erfüllen.

In the communication of the European Central Bank (ECB), the statement that „we act within our mandate“ is often referred to. Also among practitioners of the Eurosystem the term „mandate“ has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term „mandate“. It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation. 

Veronika Grimm, Lukas Nöh, and Volker Wieland assess the possible development of government interest expenditures as a share of GDP for Germany, France, Italy and Spain. Until 2021, these and other member states could anticipate a further reduction of interest expenditure in the future. This outlook has changed considerably with the recent surge in inflation and government bond rates. Nevertheless, under reasonable assumptions current yield curves still imply that interest expenditure relative to GDP can be stabilized at the current level. The authors also review the implications of a further upward shift in the yield curves of 1 or 2 percentage points. These implications suggest significant medium-term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. In light of these risks, governments of euro area member states should take substantive action to achieve a sustained decline in debt-to-GDP ratios towards safer levels. They bear the responsibility for making sure that government finances can weather the higher interest rates which are required to achieve price stability in the euro area.

Central banks have faced a succession of crises over the past years as well as a number of structural factors such as a transition to a greener economy, demographic developments, digitalisation and possibly increased onshoring. These suggest that the future inflation environment will be different from the one we know. Thus uncertainty about important macroeconomic variables and, in particular, inflation dynamics will likely remain high.

The authors study the impact of dissent in the ECB‘s Governing Council on uncertainty surrounding households‘ inflation expectations. They conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative.

Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households‘ uncertainty about inflation. This effect is statistically significant once the authors allow for the interaction between the treatments and individual characteristics of respondents.

The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. The findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.

 The authors study the effects of forward looking communication in an  environment of rising inflation rates on German consumers‘ inflation  expectations using a randomized control trial. They show that  information about rising inflation increases short- and long-term  inflation expectations. This initial increase in expectations can be  mitigated using forward looking information about inflation.

Among these information treatments, professional forecasters‘ projections seem  to reduce inflation expectations by more than policymakers‘  characterization of inflation as a temporary phenomenon.

The authors focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 – 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation.

The authors find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available.

However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. The authors argue that it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.

The Russian war of aggression against Ukraine since 24 February 2022 has intensified the discussion of Europe’s reliance on energy imports from Russia. A ban on Russian imports of oil, natural gas and coal has already been imposed by the United States, while the United Kingdom plans to cease imports of oil and coal from Russia by the end of 2022. The German Federal Government is currently opposing an energy embargo against Russia. However, the Federal Ministry for Economic Affairs and Climate Action is working on a strategy to reduce energy imports from Russia. In this paper, the authors give an overview of the German and European reliance on energy imports from Russia with a focus on gas imports and discuss price effects, alternative suppliers of natural gas, and the potential for saving and replacing natural gas. They also provide an overview of estimates of the consequences on the economic outlook if the conflict intensifies.

High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. The authors address these concerns in two ways: First, they expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, they explain the predictability of the monetary policy surprises in terms of the “Fed response to news” channel of Bauer and Swanson (2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Their subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.

Die Verschuldung in der Eurozone hat neue Rekordhöhen erreicht. Die Mitgliedsländer haben versucht, die wirtschaftlichen Folgen der Corona-Pandemie durch eine massive Erhöhung der Staatsausgaben abzufedern. Es gibt verschiedene Forderungen, die Maastricht-Regeln zur Begrenzung der Staatsverschuldung abzuschaffen oder aufzuweichen. Die Autoren sehen die Gefahr einer neuen Staatsschuldenkrise in diesem Jahrzehnt, wenn es nicht gelingt, die Staatsverschuldung auf ein akzeptables Niveau zu senken.

Die Autoren präsentieren eine neue flexible Fiskalregel. Damit sollen die hohen Schuldenquoten sinken. Bei strikter Befolgung soll die Regel die hohen Schuldenquoten innerhalb eines überschaubaren Zeitraums reduzieren, selbst wenn das nominale Wachstum schwach ist. Das wird durch Simulationen mit verschiedenen Szenarien sowie durch die hypothetische Anwendung der neuen Fiskalregel auf die Volkswirtschaften der Eurozone von 2022 bis 2026 bestätigt. Schließlich greifen die Autoren den Vorschlag von ESM-Ökonomen auf, die zulässige Schuldenquote in der Eurozone von 60 auf 100 % des BIP zu erhöhen.

Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.

Over the last decades, hours worked per capita have declined substantially in many OECD economies. Using a neoclassical growth model with endogenous work-leisure choice, the authors assess the role of trend growth slowdown in accounting for the decline in hours worked. In the model, a permanent reduction in technological growth decreases steady state hours worked by increasing the consumption-output ratio.

The empirical analysis exploits cross-country variation in the timing and the size of the decline in technological growth to show that technological growth has a highly significant positive effect on hours. A decline in the long-run trend of technological growth by one percentage point is associated with a decline in trend hours worked in the range of one to three percent. This result is robust to controlling for taxes, which have been found in previous studies to be an important determinant of hours. The empirical ending is quantitatively in line with the one implied by a calibrated version of the model and the authors provide support for the model‘s implication that the effect on hours works via changes in the consumption-output ratio.

The authors present evidence of a new propagation mechanism for wealth inequality, based on differential responses, by education, to greater inequality at the start of economic life. The paper is motivated by a novel positive cross-country relationship between wealth inequality and perceptions of opportunity and fairness, which holds only for the more educated. Using unique administrative micro data and a quasi-field experiment of exogenous allocation of households, the authors find that exposure to a greater top 10% wealth share at the start of economic life in the country leads only the more educated placed in locations with above-median wealth mobility to attain higher wealth levels and position in the cohort-specific wealth distribution later on. Underlying this effect is greater participation in risky financial and real assets and in self-employment, with no evidence for a labor income, unemployment risk, or human capital investment channel. This differential response is robust to controlling for initial exposure to fixed or other time-varying local features, including income inequality, and consistent with self-fulfilling responses of the more educated to perceived opportunities, without evidence of imitation or learning from those at the top.

(Updated version 2023)

The authors identify U.S. monetary and fiscal dominance regimes using machine learning techniques. The algorithms are trained and verified by employing simulated data from Markov-switching DSGE models, before they classify regimes from 1968-2017 using actual U.S. data. All machine learning methods outperform a standard logistic regression concerning the simulated data. Among those the Boosted Ensemble Trees classifier yields the best results. The authors find clear evidence of fiscal dominance before Volcker. Monetary dominance is detected between 1984-1988, before a fiscally led regime turns up around the stock market crash lasting until 1994. Until the beginning of the new century, monetary dominance is established, while the more recent evidence following the financial crisis is mixed with a tendency towards fiscal dominance.

The author argues that the European Central Bank should adjust its strategy in order to consider broader measures of inflation in its policy deliberations and communications. In particular, he points out that a broad measure of domestic goods and services price inflation such as the GDP deflator has increased along with the euro area recovery and the expansion of monetary policy since 2013, while HICP inflation has become more variable and, on average, has declined. Similarly, the cost of owner-occupied housing, which is excluded from the HICP, has risen during this period.

Furthermore, he shows that optimal monetary policy at the effective lower bound on nominal interest rates aims to return inflation more slowly to the inflation target from below than in normal times because of uncertainty about the effects and potential side effects of quantitative easing.

How will a changing climate impact the creditworthiness of governments over the very long term? Financial markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, the authors simulate the effect of climate change on sovereign credit ratings for 108 countries, creating the world’s first climate-adjusted sovereign credit rating. The study offers a first methodological approach to extend the long-term rating to an ultra-long-term reality, aiming at long-term investors, but also regulators and rating agencies.

Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The authors show how such features in a central bank’s collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.

Can boundedly rational agents survive competition with fully rational agents? The authors develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Their novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.

High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a „Fed information effect“ channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected.

The authors show that these empirical results are also consistent with a „Fed response to news“ channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. They provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, regressions that include the previously omitted public macroeconomic news, high-frequency stock market responses to Fed announcements, and a new survey that they conduct of individual Blue Chip forecasters all indicate that the Fed and private sector are simply responding to the same public news, and that there is little if any role for a „Fed information effect“.

This paper demonstrates a failure of standard, generalized Schur (or QZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.

The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.

The authors examine the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. They develop a medium-scale three-region DSGE model and show that the impact of a cut in the employers’ social security contributions rate does not vary significantly under different exchange rate regimes. They find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability.

Finally, they assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.

The so-called Troika, consisting of the EU-Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), was supposed to support the member states of the euro area which had been hit hard by a sovereign debt crisis. For that purpose, economic adjustment programs were drafted and monitored in order to prevent the break-up of the euro area and sovereign defaults. The cooperation of these institutions, which was born out of necessity, has been partly successful, but has also created persistent problems. With the further increase of public debt, especially in France and Italy, the danger of a renewed crisis in the euro area was growing.

The European Stability Mechanism (ESM) together with the European Commission will replace the Troika in the future, following decisions of the EU Summit of December 2018. It shall play the role of a European Monetary Fund in the event of a crisis. The IMF, on the other side, will no longer play an active role in solving sovereign debt crises in the euro area. The current course is, however, inadequate to tackle the core problems of the euro zone and to avoid future crises, which are mainly structural in nature and due to escalating public debt and lack of international competitiveness of some member countries.

The current Corona crisis will aggravate the institutional problems. It has led to a common European fiscal response ("Next Generation EU"). This rescue and recovery program will not be financed by ESM resources and will not be monitored by the ESM. One important novelty of this package is that it involves the issuance of substantial common European debt.

Despite the increasing use of cashless payment instruments, the notion that cash loses importance over time can be unambiguously refuted. In contrast, the authors show that cash demand increased steeply over the past 30 years. This is not only true on a global scale, but also for the most important currencies in advanced countries (USD, EUR, CHF, GBP and JPY). In this paper, they focus especially on the role of different crises (technological crises, financial market crises, natural disasters) and analyse the demand for small and large banknote denominations since the 1990s in an international perspective. It is evident that cash demand always increases in times of crises, independent of the nature of the crisis itself. However, largely unaffected from crises we observe a trend increase in global cash aligned with a shift from transaction balances towards more hoarding, especially in the form of large denomination banknotes.

The authors embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the “missing disinflation puzzle”), and a permanent gap between output and the pre-crisis trend output.

In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).

Occasionally binding constraints have become an important part of economic modelling, especially since western central banks see themselves (again) constraint by the so-called zero lower bound (ZLB) of the nominal interest rate. A binding ZLB constraint poses a major problem for a quantitative-structural analysis: Linear solution methods do no work in the presence of a non-linearity such as the ZLB and existing alternatives tend to be computationally demanding. The urge to study macroeconomic questions related to the Great Recession and the  Covid-19 crisis in a quantitative-structural framework requires algorithms that are not only accurate, but that are also robust, fast, and computationally efficient.

A particularly important application where efficient and fast methods for occasionally binding constraints (OBCs) are needed is the Bayesian estimation of macroeconomic models. This paper shows that a linear dynamic rational expectations system with OBCs, depending on the expected duration of the constraint, can be represented in closed form. Combined with a set of simple equilibrium conditions, this can be exploited to avoid matrix inversions and simulations at runtime for signifcant gains in computational speed.

Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, the authors compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). They find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.

Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a large set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well; current estimates of the global equilibrium rate rely on only a few countries; and estimates for a more diverse set of countries can improve understanding of the drivers. The authors propose a model and estimation strategy that decompose ex ante real interest rates into a permanent and transitory component even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods.

Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.

The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. The authors shows how a regular proportionality check could be integrated in the ECB’s strategy that is currently undergoing a systematic review. In particular, they propose to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.

In this paper we adapt the Hamiltonian Monte Carlo (HMC) estimator to  DSGE models, a method presently used in various fields due to its  superior sampling and diagnostic properties. We implement it into a  state-of-the-art, freely available high-performance software package, Stan. We estimate a small scale textbook New-Keynesian model and the  Smets-Wouters model using US data. Our results and sampling diagnostics  confirm the parameter estimates available in existing literature. In  addition, we find bimodality in the Smets-Wouters model even if we  estimate the model using the original tight priors. Finally, we combine  the HMC framework with the Sequential Monte Carlo (SMC) algorithm to  create a powerful tool which permits the estimation of DSGE models with  ill-behaved posterior densities.

Using a nonlinear Bayesian likelihood approach that fully accounts for the zero lower bound on nominal interest rates, the authors analyze US post-crisis business cycle dynamics and provide reference parameter estimates. They find that neither the inclusion of financial frictions nor that of household heterogeneity improve the empirical fit of the standard model, or its ability to provide a joint explanation for the post-2007 dynamics. Associated financial shocks mis-predict an increase in consumption. The common practice of omitting the ZLB period in the estimation severely distorts the analysis of the more recent economic dynamics.

Did the Federal Reserves’ Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, the authors estimate a large-scale DSGE model over the sample from 1998 to 2020, including data of the Fed’s balance sheet. The authors allow for QE to affect the economy via multiple channels that arise from several financial frictions. Their nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. They find that between 2009 to 2015, QE increased output by about 1.2 percent. This reflects a net increase in investment of nearly 9 percent, that was accompanied by a 0.7 percent drop in aggregate consumption. Both, government bond and capital asset purchases were effective in improving financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated which led to a mild disinflationary effect of about 0.25 percent annually.

Mit einem um die Behandlungskapazität des Gesundheitssystems erweiterten epidemiologischen SIRD-Modell werden Mechanismen und Dynamik einer Virusepidemie wie Corona anhand von stilisierten politischen Reaktionsmustern (Ignore, Shutdown, Ignore-Shutdown-Relax) simuliert. Ferner werden aus dem Modell Lehren für die statistische Analyse von Corona gezogen, wie die Aussagekraft publizierter Verdopplungszeiten und Reproduktionszahlen. Die Dunkelziffer unbestätigter Fälle und die im Epidemieverlauf variable Genauigkeit von medizinischen Infektionstests werden diskutiert. Zur Messung der medizinischen Kosten von Corona sowie für regionale und internationale Vergleiche wird ein Schadensindex der verlorenen Lebenszeit vorgeschlagen. Zuletzt geht die Arbeit kurz auf die ökonomischen Kosten von Corona in Deutschland ein.

This paper summarizes key elements of the German Federal Constitutional Court’s decision on the European Central Bank’s Public Sector Asset Purchase Programme. It briefly explains how it is possible for the German Court to disagree with the ruling of the Court of Justice of the European Union. Finally, it  makes  suggestions concerning a practical way forward for the Governing Council of the ECB in light of these developments.

Das Working Paper bietet die zusammenfassende Stellungnahme von Prof. Volker Wieland zum Ankaufprogramm der Europäischen Zentralbank für Anleihen des öffentlichen Sektors (Public Sector Purchase Programme, PSPP) am Bundesverfassungsgericht am 30.07.2019. Dabei liegt der Schwerpunkt auf der Frage der Einordnung des PSPP als monetäre, geldpolitische Maßnahme und der Verhältnismäßigkeit des Programms und seiner Umsetzung. Ebenfalls wird kurz auf die weiteren Fragen zur Umsetzung, insbesondere Ankündigung, Begrenzung und Abstand zum Primärmarkt für Staatsanleihen eingegangen.

There is increasing interest in applying lessons learned from household finance to the design of regulation, both within and across international borders. However, household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. The authors present an overview of the rapidly expanding literature on household finance, beginning with the theory and empirics of asset market participation and asset allocation over the lifecycle. They discuss household choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees and survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. They also connect the household to factors such as its social environment, cultural and hereditary factors, and financial literacy and suggest directions for future research.

The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, the authors provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.

In this paper, the authors focus on individuals' decisions on stock market participation and exposure and on their underlying subjective expectations of future stock market returns, as well as subjective perceptions of recent past returns. Based on survey data from a representative sample of the French population, the authors examine whether there is a significant role for informative social interactions in each of these aspects of stockholding behavior. Their findings support that, in a financially developed economy with a mature stock market, informative social interactions are present and pervasive across perceptions, expectations, and behavior, both at the extensive and at the intensive margin.

Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.

In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) – colloquially labelled as Quantitative Easing (QE).

Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and – even more – SMP in conjunction with the transfer of risks to the ESCB speak against it.

The authors contribute to the debate regarding the reliability of output gap estimates. As an alternative to the Hodrick-Prescott (HP) filter, they propose a simple modification of the filter proposed by Hamilton in 2018 that shares its favorable real-time properties, but leads to a more even coverage of typical business cycle frequencies.

Based on output growth and inflation forecasts and a comparison to revised output gap estimates from policy institutions, they find that real-time output gaps based on the modified Hamilton filter are economically much more meaningful measures of the business cycle than those based on other simple statistical trend-cycle decomposition techniques such as the HP or the Bandpass filter.

The authors analyze cyclical co-movement in credit, house prices, equity prices, and long-term interest rates across 17 advanced economies. Using a time-varying multi-level dynamic factor model and more than 130 years of data, they analyze the dynamics of co-movement and compare recent developments to earlier episodes such as the early era of financial globalization from 1880 to 1913 and the Great Depression.

They find that joint global dynamics across various financial quantities and prices as well as variable-specific global co-movements are important to explain fluctuations in the data. From a historical perspective, global co-movement in financial variables is not a new phenomenon. For equity prices, however, global cycles play currently a historically unprecedented role, explaining more than half of the fluctuations in the data.

Global cycles in credit and housing have become much more pronounced and longer, but their importance in explaining dynamics has only increased for some economies including the US, the UK and Nordic European countries. Regarding GDP, the authors also find an increasing role for a global business cycle.

(Updated version 2023)

There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, the authors find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The short-run impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%.

At the same time, the TCJA does not pay for itself. In the analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025.

The authors show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect.

Distributed ledger technology especially in the form of publicly coordinated validation networks such as Ethereum and Bitcoin with their own monetary circles provide for a revealing litmus test for current financial regulatory schemes. The paper highlights the interrelation between distributed coordination and the emission of virtual currency to make sense of the function of the new monetary phenomenon. It then argues for the regulation of financial services on the ground of the technology to ensure integrity standards. In this respect, it is useful to gear the development of a regulatory scheme towards the existing financial regulatory principles. However, future measures of the regulators must take the distributed nature of the platforms into account by relying on a “regulated self-regulation” of the community. Finally, the article focuses on the shortcomings of the current EU regulatory regimes, especially the regulation frameworks regarding financial services, payment services and electronic money.

Households' ability to form accurate macroeconomic expectations has major implications for the effectiveness of fiscal and monetary policy. However, forecasting macroeconomic variables is a complex task. Based on evidence from the German Reunification, the authors examine how consumers adapt to a new environment in their macroeconomic forecasting. They document that even decades after the reunification East Germans expect higher inflation and make larger forecast errors than West Germans. Their findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations.

Policymakers attach an important role to the macroeconomic outlook of households. Using a representative online panel form the U.S., the authors examine how individuals' macroeconomic expectations causally affect their personal economic prospects and their behavior and provide them with different professional forecasts about the likelihood of a recession. The authors find that groups with the largest exposure to aggregate risk, such as individuals working in cyclical industries, are most likely to respond to an improved macroeconomic outlook, while a large fraction of the population is unlikely to react.

This paper uses unique administrative data and a quasi-field experiment of exogenous allocation in Sweden to estimate medium- and longer-run effects on financial behavior from exposure to financially literate neighbors. It contributes evidence of causal impact of exposure and of a social multiplier of financial knowledge, but also of unfavorable distributional aspects of externalities. Exposure promotes saving in private retirement accounts and stockholding, especially when neighbors have economics or business education, but only for educated households and when interaction possibilities are substantial.Findings point to transfer of knowledge rather than mere imitation or effects through labor, education, or mobility channels.

The sovereign debt crisis in the euro area was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. The author develops a DSGE model that captures the ZLB and fiscal stress and analyzes the effects of government spending shocks. He finds that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size.

The authors relax the standard assumption in the dynamic stochastic general equilibrium (DSGE) literature that exogenous processes are governed by AR(1) processes and estimate ARMA (p,q) orders and parameters of exogenous processes. Methodologically, they contribute to the Bayesian DSGE literature by using Reversible Jump Markov Chain Monte Carlo (RJMCMC) to sample from the unknown ARMA orders and their associated parameter spaces of varying dimensions.

In estimating the technology process in the neoclassical growth model using post war US GDP data, they cast considerable doubt on the standard AR(1) assumption in favor of higher order processes. They find that the posterior concentrates density on hump-shaped impulse responses for all endogenous variables, consistent with alternative empirical estimates and the rigidities behind many richer structural models. Sampling from noninvertible MA representations, a negative response of hours to a positive technology shock is contained within the posterior credible set. While the posterior contains significant uncertainty regarding the exact order, the results are insensitive to the choice of data filter; this contrasts with the authors’ ARMA estimates of GDP itself, which vary significantly depending on the choice of HP or first difference filter.

What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets.

In his paper, Athanasios Orphanides draws lessons from the experience of the Bank of Japan (BoJ) since the late 1990s for the institutional design of independent central banks. He comes to the conclusion that lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The BoJ’s experience with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank adopted in 2013.

Für Zwecke des privaten Konsums werden ständig Gegenwarts- und Zukunftsgüter bewertet und gehandelt. Ein zuverlässiges und umfassendes Maß für die allgemeine Kaufkraft des Geldes und deren Veränderung sollte diesem Grundsachverhalt Rechnung tragen. Im Unterschied zu konventionellen statistischen Verbraucherpreisindizes ist ein ökonomischer Lebenskostenindex intertemporal angelegt, da er die effektiven Konsumgüterpreise (Effektivpreise) über den Planungshorizont der privaten Haushalte bündelt. Ein Preisstabilitätsstandard, der diesen Zusammenhang ausblendet, ist tendenziell verzerrt und leistet einer asymmetrischen Geldpolitik Vorschub.

Effektivpreise sind Gegenwartspreise für künftigen Konsum, sie berücksichtigen Güterpreise und Zinsen bzw. Vermögenspreisänderungen, sind konsumtheoretisch und wohlfahrtsökonomisch fundiert und bilden die zentralen Bausteine für die Modellklasse der ökonomischen Lebenskostenindizes. Nutzentheoretisch gesehen sind Effektivpreise bewerteter Grenznutzen der letzten konsumierten Gütereinheit, und die daraus abgeleiteten Effektiven Inflationsraten sind intertemporale Grenzraten der Substitution.

Die Autoren entwickeln einen intertemporalen Lebenskostenindex auf der Grundlage des Konzepts der Effektivpreise und stellen empirische Zeitreihen und kohortenspezifische Szenarioanalysen für Deutschland vor.

Erschienen in: Jahrbücher für Nationalökonomie und Statistik, März 2020, “Lebenshaltungskosten und Effektivpreise: Theorie und Evidenz für Deutschland”.

With the increasing pressure to abolish cash and the moves to restrict its use, the regulation of legal tender in the primary law of the EU has gained enhanced attention. Therefore, the author analyzes the terms currency, money, cash, and legal tender from a legal point of view.

The paper illustrates based on an example the importance of consistency between the empirical measurement and the concept of variables in estimated macroeconomic models. Since standard New Keynesian models do not account for demographic trends and sectoral shifts, the authors proposes adjusting hours worked per capita used to estimate such models accordingly to enhance the consistency between the data and the model. Without this adjustment, low frequency shifts in hours lead to unreasonable trends in the output gap, caused by the close link between hours and the output gap in such models.

The retirement wave of baby boomers, for example, lowers U.S. aggregate hours per capita, which leads to erroneous permanently negative output gap estimates following the Great Recession. After correcting hours for changes in the age composition, the estimated output gap closes gradually instead following the years after the Great Recession.

Helmut Siekmann erläutert in seinem Beitrag die Einstandspflicht der Bundesrepublik Deutschland für die Deutsche Bundesbank und die Europäische Zentralbank. Dabei kommt er zu dem Schluss, dass weder eine „Haftung der Bundesrepublik Deutschland für Verluste der EZB noch eine Verpflichtung zur Auffüllung von aufgezehrtem Eigenkapital“ besteht.

Dieser Beitrag ist zuerst erschienen in:
Festschrift für Theodor Baums zum siebzigsten Geburtstag, S. 1145-1179, Helmut Siekmann, Andreas Cahn, Tim Florstedt, Katja Langenbucher, Julia Redenius-Hövermann, Tobias Tröger, Ulrich Segna, Hrsg., Tübingen, Mohr Siebeck 2017

Financial market interactions can lead to large and persistent booms and recessions. Instability is an inherent threat to economies with speculative financial markets. A central bank’s interest rate setting can amplify the expectation feedback in the financial market and this can lead to unstable dynamics and excess volatility. The paper suggests that policy institutions may be well-advised to handle tools like asset price targeting with care since such instruments might add a structural link between asset prices and macroeconomic aggregates. Neither stock prices nor indices are a good indicator to base decisions on.

The level of capital tax gains has high explanatory power regarding the question of what drives economic inequality. On this basis, the authors develop a simple, yet micro-founded portfolio selection model to explain the dynamics of wealth inequality given empirical tax series in the US. The results emphasize that the level and the transition of speed of wealth inequality depend crucially on the degree of capital taxation. The projections predict that – continuing on the present path of capital taxation in the US – the gap between rich and poor is expected to shrink whereas “massive” tax cuts will further increase the degree of wealth concentration.

The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remedy the impediments to the desirable incentive effect of private sector involvement (PSI) that emanate from a lack of predictability of outcomes, if it compels banks to issue a sufficiently sized minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects.

The main problem, echoing the general concerns voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus alleviate the predicament of investors in bail-in debt, at best, only insufficiently. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to gauge the relevant risk of PSI in a bank’s failure correctly at the time of purchase, subsequent adjustment of MREL-prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions may prove inadequate and so may market discipline that follows from them.

The pending European legislation aims at an implementation of the already complex specifications of the Financial Stability Board (FSB) for Total Loss Absorbing Capacity (TLAC) by very detailed and case specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. What gets lost in this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is hardly conceivable that the pricing of MREL-instruments reflects an accurate risk-assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this chapter looks in more detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework.

This paper analyzes the bail-in tool under the Bank Recovery and Resolution Directive (BRRD) and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis, the key features for an effective bail-in tool can be derived.

These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process, which entails ample discretion of the authorities also in forcing private sector involvement. Moreover, the idea that nearly all positions on the liability side of a bank’s balance sheet should be subjected to bail-in is misguided. Instead, a concentration of PSI in instruments that fall under the minimum requirements for own funds and eligible liabilities (MREL) is preferable.

Finally, this paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible form the resolution process as such.

Since 2014 the ECB has implemented a massive expansion of monetary policy including large-scale asset purchases and negative policy rates. As the euro area economy has improved and inflation has risen, questions concerning the future normalization of monetary policy are starting to dominate the public debate.

The study argues that the ECB should develop a strategy for policy normalization and communicate it very soon to prepare the ground for subsequent steps towards tightening. It provides analysis and makes proposals concerning key aspects of this strategy. The aim is to facilitate the emergence of expectations among market participants that are consistent with a smooth process of policy normalization.

Quantitative macroeconomic models play an important role in informing policy makers at central banks and other institutions about the consequences of monetary, fiscal and macroeconomic policies. Macroeconomic models, however, have been criticized for failing to predict the Great Recession of 2008/09 or at least failing to provide adequate warning of such a massive contraction.

This criticism has further inspired researchers to work on better integrating imperfections and risks associated with the financial sector in business cycle analysis. The authors review some of the recent developments in structural macroeconomic modelling and then analyze the implications of these models for the design of monetary policy by drawing upon a public model archive (www.macromodelbase.com).

The models suggest that a simple policy rule robust to model uncertainty involves a weaker response to inflation and the output gap in the presence of financial frictions as compared to earlier generations of such models. Leaning-against-the-wind policies in models of this class estimated for the euro area do not lead to substantial gains. The authors argue that the speedy adoption of New Keynesian DSGE models featuring financial frictions in the toolkit of central banks should be acclaimed and central banks would be well advised to increase the diversity of modelling approaches they employ.

During the 1970s, industrial countries, including the US and continental Europa, experienced a combination of slow productivity growth and high unemplyoment. Subsequent research has shown that the standard model of unemployment actually gives counterfactual predictions. Motivated by the observation that the 1970s were also characterized by high and rising inflation, Tesfaselassie and Wolters examine the effect of growth on unemployment in the presence of nominal price rigidity.

The authors demonstrate that the effect of growth on unemployment may be positive or negative. Faster growth leads to lower unemployment if the rate of inflation is high enough. There is a threshold level of inflation below which faster growth leads to higher unemployment and above which faster growth leads to lower unemployment. The threshold level in turn depends on labor market characteristics, such as hiring efficiency, the job destruction rate, workers' relative bargaining power and the opportunity cost of work.

To broaden the scope of monetary policy, cash abolishment is often suggested as a means of breaking through the zero lower bound. However, practically nothing is said about the welfare costs of such a proposal. Rösl, Seitz and Tödter argue that the welfare costs of bypassing the zero lower bound can be analyzed analytically and empirically by assuming negative interest rates on cash holdings. They gauge the welfare effects of abolishing cash, both, for the euro area and for Germany.

Their findings suggest that the welfare losses of negative interest rates incurred by money holders are large, notably if implemented in the current low interest rate environment. Imposing a negative interest rate of 3 percentage points on cash holdings and reducing the interest on all assets included in M3 creates a deadweight loss of € 62bn for the euro area and of €18bn for Germany. Therefore, the authors argue that cash abolishment or negative interest rates on cash to break through the zero lower bound at any price can hardly be a meaningful policy goal.

House financing has played a prominent role in advanced economies. In addition, most of the banking crises in advanced economies were associated with boom-bust cycles in house prices. Prominent researchers suggest that more grants for household debt reduction would have provided a significant boost to the economy lacking aggregate demand after the Great Recession of 2007. In contrast, leading policy makers at that time, such as Geithner and Summers, argue differently. In his paper, Yoo comes up with a dynamic stochastic equilibrium (DSGE) model to evaluate the relative effectiveness of a policy to inject capital into banks versus a policy to relieve households of mortgage debt. He concludes that in the middle of a housing debt crisis, when households are highly leveraged, the short-run effects of the debt relief policy are more substantial. When the zero lower bound is additionally considered, the debt relief pölicy can be much more powerful in boosting the economy both in the short-run and in the long-run.

The currrent debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. Beyer and Wieland re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams and further modifications. They provide new estimates for the United States, the euro area and Germany and subject them to sensitivity tests. Beyer and Wieland conclude that due to the great uncertainty and sensitivity, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if those estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.

The debate about the solvency of the banking system in Italy and the exit of the United Kingdom from the European Union opened the eyes for a more informed view on the legal problems related to the procedures and differences between the exit from the European Union and the introduction of a new currency. Helmut Siekmann analyzes whether it is legally possible for a EU member state to leave the euro area or to be excluded from the euro area coming to the conclusion that it is highly questionable to exclude a member state from the EU or Monetary Union.

According to Siekmann, it is neither legally possible for a member state whose currency is the euro to introduce an new currency instead or parallel to the euro or to obtain a permission from the organs of the EU or the member states to withdraw from the euro area or to implement a parallel currency. (14.11.16)

The use of cash is being increasingly restricted inside the European Monetary Union and in May 2016 the European Central Bank decided to end the production of 500 euro banknotes. In general, as main arguments cost-effectiveness and the fight against terrorism are cited. In his Working Paper, Helmut Siekmann analyzes the legal basis of banknotes and coins in the European Union.

According to Siekmann, from a legal point of view, the abolition of cash or restrictions appears to be an infraction of EU law and of German constitutional law. Depending on the details, this also holds true for mere restrictions.

For Siekmann another argument for the constraints is probably most important but not disclosed so much in public: “Making the use of cash more costly or abolishing it completely may finally bestow upon the present ‘unconventional’ monetary policy the effectiveness it appears to be lacking so far”. (29.09.16)

Central banks and international organizations need to evaluate the impact and interaction of policy instruments in order to design effective policy strategies. In their working paper Prof. Volker Wieland and his team of the Macroeconomic Model Database (MMB) present a new and systematic approach for comparative analysis of models.

Its computational implementation enables individual researchers to conduct systematic model comparison and policy evaluations easily. The authors review the literature on model comparison and also demonstrate how models become reproducible for other researchers.

The new version of the open archive MMB 2.1, which is accessible via internet under www.macromodelbase.com, contains 68 models and various policy rules. The MMB offers many options for comparing model structures and policy implications and for exploring a particular model in great detail. There is no need for bringing together teams of models builders. The platform serves as an archive of models developed at different times and based on different theories on how the economy functions. The tool clarifies the strengths and weaknesses of different models and enables users to check the results of studies or assess the impact of parameter shifts.

This paper is published in the Handbook of Macroeconomics, Vol.2, from John B. Taylor and Harald Uhlig, released in December 2016.

The European Commission is promoting the preparations for the introduction of a European Deposit Insurance Scheme, EDIS. In his working paper, Helmut Siekmann points out the construction errors in the draft.

Instead of harmonizing the deposit protection funds of the European member states, the European Commission aims at creating a European Deposit Insurance Scheme on a European level. This is precisely where Siekmann’s criticism sets in. “Whether such an insurance can serve its purpose depends crucially on the financial means that are necessary”, Siekmann warns. In his opinion, the target level of the fund has been estimated too low. Even if further shortcomings in the design as the determination of amounts and the calculation of default probabilities were fixed, Siekmann remains skeptical as to whether premium differences among banks of various EU member states could be implemented. In his view, also the question of a guarantee by a solvent public authority remains open in the current draft, which is the key issue for the confidence of the population. (25.06.16)

Athanasios Orphanides examines some of the decisions taken by the Federal Reserve and the European Central Bank (ECB) during the crisis raising the question whether it is appropriate for an independent central bank in a democratic society to use its discretionary authority to decide which stakeholders of which private entity to wipe out and which to support.

Fiscal implications of central bank policies tended to be seen as relatively minor and usually escaped close scrutiny. However, in the aftermath of the global financial crisis, central banks engaged in unconventional monetary policy as well as in preferential lending operations. At the zero lower bound, monetary and fiscal policies become much closer linked than during periods when interest rates are clearly above zero.

IMFS Research Fellow Orphanides warns that provision of credit by a central bank to some private or government-related entities may sustain entities that would have collapsed otherwise. He analyzes some of the measures of the Fed and the ECB, asking whether it is the proper function of an independent central bank in an democratic society to use its discretion and decide which sectors of the economy deserve the support of the balance sheet and which don’t. (15.07.16)

Helmut Siekmann analyzes the relationship between power, jurisprudence and economic law, bridging the gap between the Austrian School of Economics represented by Carl Menger, Eugen von Böhm-Bawerk and Ernst-Joachim Mestmäcker from the legal side and, on the other hand, the legal competences of the European Central Bank (ECB). Siekmann explores the question of where the independence of the ECB ends and which legal limits the ECB has to respect while maintaining price and financial stability. Finally, Siekmann points out risks that result from the ECB’s expansionary monetary policy.

According to Siekmann, from a legal perspective, the role of monetary policy does not involve obliging states to implement structural reforms and to pursue a sound fiscal policy. Also in view of the principle of democracy there have to be limits for autonomy, he argues. Otherwise it has to be justified by special reasons, which holds true for price stability but not for financial stability, Siekmann concludes. (07.07.16)

For John B. Taylor of Stanford University and Volker Wieland, research on the real equilibrium interest rate is not yet useful for monetary policy although there has been a lot of research recently.

Estimates of equilibrium real interest rates even have been taken into account in policy making. The common finding is that the rate has declined to a level not seen in decades. In their working paper, however, Taylor and Wieland show that the perceived decline may well be due to shifts in regulatory policy and monetary policy that have been omitted from the research. (17.05.16)

Applying simple policy rules to the interest rate decisions of the ECB since 2013, Tilman Bletzinger and Volker Wieland find out that these rules call for an increase in the policy rate in the course of 2016. However, the announcement of debt purchases till March 2017 effectively postponed the possibility of a rate hike until after that date. According to the authors this can involve significant risks.

Looking at the policy easing implemented by the European Central Bank (ECB) since summer 2013 when ECB President Mario Draghi took the unprecedented step of stating the Governing Council’s expectation for future interest rates more specifically, Bletzinger and Wieland compare the ECB interest rate decisions to various rules such as the Taylor rule and the simple rule by Orphanides and Wieland.

They authors investigate to what extent the policy easing mirrors the rate recommendations of these rule coming to the conclusion that ECB interest rate policy has been below the interest rate prescriptions from those rules. However, the announcement of debt purchases till March 2017 effectively postponed the possibility of a rate hike until after that date. Finally, the authors point out that a long period of low interest rates is likely to increase the risk of financial instability and asset-price driven boom-bust cycles and to create incentives for euro are members’ states’ governments to postpone consolidation and reform efforts. (16.02.16)

Helmut Siekmann analyzes the tasks and competencies of the European Central Bank (ECB) and the European System of Central Banks (ESCB) as a whole.

Based on the primary law of the European Union as defined by the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU) the Professor of Money, Currency and Central Bank Law sums up the basic principles and responsibilities in the monetary union.

In this regard, he points out that there is no inflation target according the EU law but only the target of price stability and that there is no mandate from a legal point of view. He also explains the limits of the implementation of monetary policy instruments. “Monetary policy shall apply to the whole monetary area prohibiting the selective subsidization of single members by the central bank”, Siekmann writes. He also underlines the differences between the ESCB and the Federal Reserve System of the United States. (22.01.16)

Estimates of medium-term equilibrium real interest rates are cited very often in monetary policy. However, they do not form a sound basis for monetary policy decisions, professor Volker Wieland and IMFS researcher Robert Beyer write in the working paper.

In 2014, Lawrence Summers used estimates of equilibrium real interest rates based on the Laubach-Williams model as evidence for a secular stagnation. Federal Reserve Chair Janet Yellen justified zero-rate policy in a speech in March 2015, referring to the equilibrium real interest rates in the medium term.

According to Robert Beyer and Volker Wieland, estimates of equilibrium real interest rates should not be applied to monetary policy and are very questionable. In this working paper, the authors investigate the estimates for the United States, Germany and the euro area coming to the conclusion that estimates based on the Laubach-Williams model are very problematic. Even relatively small changes in the assumptions for the econometric specification or in the data used lead to economically relevant changes of the estimates, the authors write. The Laubach-Williams model was trying to estimate various variables. Therefore, current estimates close to zero should not be used as a basis for important monetary or fiscal policy decisions. (11.01.16)

Helmut Siekmann examines the questions whether it is legally possible for a member state to leave the euro area or introduce a parallel currency.

In his Working Paper, IMFS Professor Helmut Siekmann sums up the legal questions linked to the political agenda in Greece in the year 2015 with two elections and the negotiations about a third rescue package. Siekmann investigates the debate about exit, exclusion or parallel currencies in the euro area from a legal perspective coming to the conclusion that it is legally not possible for a member state whose currency is the euro to exit or withdraw from the euro area or introduce of a new currency parallel to the euro. (30.12.15)

The debt brake in the federal states of Germany is not to be used as a pretext in order to shift borrowing from the Länder to local authorities or to diminish the current financial basis excessively. This is the assessment of Professor Dr. Dr. h.c. Helmut Siekmann in his statement regarding the establishment of the debt brake in the state constitution of North Rhine-Westphalia.

Currently, the state parliament of North Rhine-Westphalia is examining whether to include the debt brake in the state constitution. As from next year, according to the Grundgesetz the Federal Government is not allowed to assume new debt. As of 2020, also the Laender are obliged to submit a balanced budget without facing new debt. In any case, the debt brake applies to the Länder. However, by including the debt brake into the state constitution many detailed issues could be clarified. Half of the federal states, among them Bavaria, Hesse or Saxony, have already taken this step. In his statement at the state parliament of North Rhine-Westphalia, IMFS Professor Siekmann pointed out the loopholes in the legal framework as well as possible consequences. (21.10.15)

This paper investigates the effect of a change in informational environment of borrowers on the organizational design of bank lending. We use micro-data from a large multinational bank and exploit the sudden introduction of a credit registry, an information-sharing mechanism across banks, for a subset of borrowers. Using within borrower and loan officer variation in a difference-in-difference empirical design, we show that expansion of credit registry led to an improvement in allocation of credit to affected borrowers. There was a concurrent change in the organizational structure of the bank that involved a dramatic increase in delegation of lending decisions of affected borrowers to loan officers. We also find a significant expansion in scope of activities of loan officers who deal primarily with affected borrowers, as well as of their superiors. There is suggestive evidence that larger banks in the economy were better able to implement similar changes as our bank. We argue that these patterns can be understood within the framework of incentive-based and information cost processing theories. Our findings could help rationalize why improvements in the information environment of borrowers may be altering the landscape of lending by moving decisions outside the boundaries of financial intermediaries.

Patrick Tuschl focuses on the support measures for German banks during the financial crisis, investigating how similar state aid can be rated in the future. More than 18 billion euros the Commerzbank had received as guarantees, capital injection or participation by the government in the course of the financial crisis. Also Hypo Real Estate, WestLB, SachsenLB, and IKB obtained support from the state. The EU approved the state aid. In principle, state aid is regarded as an economic advantage, thus, being prohibited. In his Working Paper, Tuschl examines the legal basis of state aid in terms of the EU laws, pointing out the exemptions the EU Commission referred to in practice. (15.10.15)

Even six years after the end of the recession in the United States the Federal Reserve has not yet started the process of normalization. In his new Working Paper, IMFS Research Fellow Athanasios Orphanides (Massachusetts Institute of Technology) examines the causes of this delay and suggests a way out of the Fed’s current situation.

Orphanides aims at putting the Federal Reserve monetary policy in a historical perspective. Looking at times of earlier recessions and the following liftoffs in 1983, 1994 and 2004, he points out that the liftoffs – that is the process of policy normalization after the end of a recession – usually ranged from within a year to within three years from the end of a recession. Based on these experiences the liftoff seems overdue after the latest recession, which was associated with a very large increase in the unemployment rate. For Orphanides one major problem is the twofold mandate of the Fed trying to achieve “maximum employment” and “stable prices” at the same time. “The temptation to explore the limits of maximum employment invites harmful discretion,” he writes. The focus on reducing unemployment is creating fear of liftoff after recessions. By trying to push the unemployment rate too hard, the Fed generates a future cost, he points out.

According to Orphanides the central bank should eschew discretion in favor of a transparent policy rule. “The publication of a simple rule by the Federal Reserve would solve the monetary policy quandary”, Orphanides concludes. The Federal Reserve should select and develop a simple rule that “reflects the present state of knowledge and is robust to error”. At the same time, it could “retain the discretionary authority for periodic review and adaption of its rule, using the expertise available in the Federal Reserve System”. (31.08.15)

The macroeconomic implications of raising taxes on top income earners are in the focus of the IMFS Working Paper No. 94 by Bettina Brüggemann of Goethe University and Jinhyuk Yoo, IMFS and Bank of Korea, demonstrating that such a tax increase leads to less inequality in both wealth and income but, on the other hand, has negative effects on the aggregate economy. The study also shows that the aggregate gain in welfare is sizable mainly due to a higher degree of distributional equality.

In two counterfactual policy experiments the top marginal tax rate is increased from 35 to 70 percent. The government then redistributes the additional tax revenue among households either by decreasing all other marginal tax rates or paying a lump-sum transfer to all households. Although the tax increase only affects a small fraction of the population, this group is more likely to hold a great portion of aggregate capital, to be highly productive or both.

Brüggemann and Yoo argue that if the top income earners change their capital holdings and hours worked after the tax increase, these responses lead to macroeconomic consequences such as changes in equilibrium prices. The rest of the population will then react to these prices by adjusting their savings and labor supply. Over time, this gives rise to changes in the distribution of income and wealth. Brüggemann and Yoo come to the conclusion that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. (22.07.15)

The implementation of macro-prudential instruments in the banking union provides the European Central Bank with insufficient momentum to effectively dampen excessive lending on pivotal credit markets as the real estate mortgage markets. This is one of the insights Tobias H. Tröger, Professor of Private Law, Trade and Business Law, Jurisprudence at Goethe University, shares in the IMFS Working Paper No. 93. Tröger, Affiliated Professor of the IMFS, has investigated the “Regulatory Influence on Market Conditions in the Banking Union”.

Analyzing not only the macro-prudential instruments and the pertinent role of national and supranational supervisors involved in the banking union but also its resolution regime Tröger comes to the conclusion that the resolution framework provides for a discretionary ad hoc bail-in. “The existence of resolution tools doesn’t guarantee their time-consistent application by political agents”, Tröger writes. In his Working Paper he describes the bail-in instrument as a regulatory intervention which seeks to ensure the private sector loss participation in a bank’s failure. Due to the discretionary ad hoc bail-in sophisticated investors will find it difficult to gauge the actual risk of loss-participation, Tröger explains. “As a consequence, default probabilities will continue to deviate from endogenously determined bank failures”. (11.06.15)

This paper empirically investigates how organizational hierarchy affects the allocation of credit within a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in roughly 2,000 bank branches in India during 1999-2006, and employing a difference-in-differences research strategy, we find that increased hierarchization of a branch decreases its ability to produce “soft” information on loans, leads to increased standardization of loans and rationing of “soft information” loans. Furthermore, this loss of information brings about a reduction in performance on loans: delinquency rates and returns on similar loans are worse in more hierarchical branches. We also document how hierarchical structures perform better in environments that are characterized by a high degree of corruption, thus highlighting the benefits of hierarchical decision making in restraining rent seeking activities. Finally, we document a channel – managerial interference – through which hierarchy affects loan outcomes.

The paper evaluates regulatory proposals mandating the deferral of bonus payments and claw-back clauses in the financial sector. We study a broadly applicable principal agent setting, in which the agent exerts e§ort for an immediately observable task (acquisition) and a task for which information is only gradually available over time (diligence). Optimal compensation contracts trade of the cost and benefit of delay resulting from agent impatience and the informational gain. Mandatory deferral may increase or decrease equilibrium diligence depending on the importance of the acquisition task. The authors provide concrete conditions on economic primitives that make mandatory deferral socially (un)desirable.

Helmut Siekmann presents an encompassing analysis of the Eurosystem’s Outright Monetary Transactions (OMT). Examining the rulings of the German constitutional court and the questions presented to the European Court of Justice, Siekmann comes to the conclusion that the German constitutional court could forbid German authorities to support OMT. Thus, he sees an incentive for the ECJ to adopt at least some of the limitations. (24.04.15)

By delineating the legal background of the European monetary union, Helmut Siekmann gives an overview about objectives, competences and obligations as the rules on government deficits and debt. Based on that, Siekmann describes the European system of central banks and explores the question whether an exit or an exclusion from the eurozone and the introduction of a new currency parallel to the euro are legally possible, taking into account the specific circumstances in Greece. (24.04.15)

Savings accounts are owned by most households, but little is known about the performance of households’ investments. The authors create a unique dataset by matching information on individual savings accounts from the DNB Household Survey with market data on account-specific interest rates and characteristics. We document considerable heterogeneity in  returns  across  households, which can be partly explained by financial sophistication. A one standard  deviation increase in financial literacy is associated with a 13% increase compared to the median interest rate. We isolate the usage of modern technology (online accounts) as  one channel through which financial literacy has a positive association with returns.

The authors offer a theory of the "boundary of the firm" that is tailored to banking, as it builds on a single ine¢ ciency arising from risk-shifting and as it takes into account both interbank lending as an alternative to integration and the role of possibly insured deposit funding.  Amongst others, it explains both why deeper economic integration should cause also greater Financial integration through both bank mergers and interbank lending, albeit this typically remains ine¢ ciently incomplete, and why economic disintegration (or "desychronization"), as currently witnessed in the European Union, should cause less interbank exposure. It also suggests that recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could all lead to substantial welfare losses.

The authors examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations. The findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision.

What happens to the lending standards of banks in times of expansionary monetary policy? One of the explanations of the credit boom that led to the recent financial crisis is that banks took excessive risks because of monetary policy rates had been “too low for too long”. Afanasyeva and Güntner show that low monetary policy rates may also induce banks to lower their lending standards that is to grant more and riskier loans. In their analysis, IMFS researcher Afanasyeva and Güntner, Assistant Professor at the University of Linz, have focused on U.S. banks’ risk attitude before the financial crisis. They found out that the U.S. banks significantly lowered their lending standards, such as the collateral requirements for firms, in response to an unexpected reduction in interest rates. Thus, the banks want to gain a larger “share of the pie”. This effect increases with the degree of interest-rate smoothing in the monetary policy rule. As a consequence, companies become more leveraged and thus more likely to default. (04.11.14)

Final publication: Journal of Monetary Economics, Vol. 111, May 2020. p.118-134 “Bank market power and the risk channel of monetary policy”

Newspaper articles about the minutes of the European Central Bank before the Cyprus bailout have made clear again how controversial the short-term loans were among central bankers. IMFS Research Fellow Athanasios Orphanides analyzes how the ECB and the Cypriot central bank "created a grey area" for the decision and looks at the consequences.

According to an article of the "New York Times", the ECB approved the so-called emergency liquidity assistance, or ELA, for the Cyprus Popular Bank although depositors were withdrawing their savings in large numbers and some members of the ECB Governing Council opposed. Orphanides, who served as governor of the Central Bank of Cyprus and, thus, as member of the Governing Council of the ECB between 2008 and 2012, explains how "political considerations associated with the February 2013 elections in Cyprus appear to have determined the continuation of the ELA provision".

Orphanides reproaches the ECB and the Central Bank of Cyprus for effectively "transforming a manageable problem in one institution into an unmanageable catastrophe for the economy of the country". With their decision, the ECB and Cypriot central bank vastly increased the cost subsequently imposed on the people of Cyprus, Orphanides argues. Thereby, the author illustrates that rules and boundaries are not sufficient "to guard us against human failings". (23.10.14)

Shadow banking is defined as credit intermediation outside the conventional banking system. The global financial crisis revealed that shadow banking can put the stability of the financial system at risk in several ways. In his new IMFS Working Paper, Tobias Tröger analyzes how the risks of the shadow banking sector can be captured more effectively.

According to new Global Financial Stability Report of the International Monetary Fund, shadow banking constitutes one-fourth of total financial intermediation worldwide. Since they are closely intertwined with the financial sector, hedge funds or money market funds can easily jeopardize the financial stability. In comparison with the highly dynamic finanical industry, the regulators, however, always get the short end of the stick.

In his paper, IMFS Associated Professor Tobias Tröger argues that a normative construction of available rules limits the scope for regulatory arbitrage and finally is more successful in regulating shadow banking activities. (15.10.14)

In their IMFS Working Paper, Markus Behn, Rainer Haselmann and Vikrant Vig identify the limits of model-based regulation in the financial sector. Based on the data of the introduction of Basel II in Germany in the aftermath of the financial crisis of 2007, the authors of the study have analyzed how the implementation of model-based regulation affect the stability of the financial sector. Hence, they investigated the development of default rates and interest rates. The authors suggest "that simpler rules may increase the efficacy of financial regulation". (16.09.14)

The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self-reinforcing deflation and recession spiral.  This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the output-inflation nexus at low trend inflation. The note concludes from this evidence that the risk of a self-reinforcing deflation remains very small. Thus, the ECB best await the impact of the long-term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September. (02.09.14)

The banking union provides for new rules. The determining factors for all financial market participants are changing as macro-prudential policy and monetary policy are closely intertwined. In a new Working Paper, Hermann Remsperger draws a preliminary balance when the financial regulations are in a state of flux.

Remsperger analyzes the relationship between macro-prudential policy and the respective tools on the one hand and monetary policy on the other. Moreover, he scrutinizes the various institutions on national and European level, like the German financial stability committee (Ausschuss für Finanzstabilität, AFS), the European Systemic Risk Board (ESRB) and the European Central Bank with the Single Supervisory Mechanism (SSM). Finally, the author pursues the question whether the new tools of macro-prudential policy alone can ensure financial stability. (02.07.2014)

Athanasios Orphanides has investigated the economic consequences of the last European communist government, which run the country between 2008, the year when also the euro was introduced, and 2013. (May 2014)

The empirical evidence currently available in the literature regarding the effects of a country's IMF program participation on its output growth is rather inconclusive. The authors propose and estimate a panel data sample selection model featuring state dependence.

Sparkassen haben einen öffentlichen Auftrag zu erfüllen. Bei der Diskussion, ob und in welchem Ausmaß dieser Auftrag erfüllt wird und ob der erstrebte Nettonutzen für die Bevölkerung und die Wirtschaft des Trägergebietes erreicht wird, spielt die Vergütung der Inhaber der Leitungsämter eine nicht zu vernachlässigende Rolle.

This paper aims at examining the U.S. regulatory framework governing financial holding companies that are permitted to operate across financial sectors by combining diverse business lines under a single corporate umbrella. To this end, it first and foremost looks into the regulatory changes that the GLB Act has instituted. Further, it  takes  account of the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was enacted in July 2010 in the aftermath of the recent financial crisis.

Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily  fit in the realm of traditional monetary policy. 

This paper examines three broad public policy goals that may overburden monetary policy:  full employment;  fiscal sustainability; and  financial stability.  While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate  benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its e ectiveness to preserve price stability and contribute to crisis management.

On July 4, 2013 the ECB Governing Council provided more specific forward guidance than in the past by stating that it expects ECB interest rates to remain at present or lower levels for an extended period of time. As explained by ECB President Mario Draghi this expectation is based on the Council’s medium-term outlook for inflation conditional on economic activity and money and credit. Draghi also stressed that there is no precise deadline for this extended period of time, but that a reasonable period can be estimated by extracting a reaction function. 

The authors use such a reaction function, namely the interest rate rule from Orphanides and Wieland (2013) that matches past ECB interest rate decisions quite well, to project the rate path consistent with inflation and growth forecasts from the survey of professional forecasters published by the ECB on August 8, 2013. This evaluation suggests an increase in ECB interest rates by May 2014 at the latest. The authors also use the Eurosystem staff projection from June 6, 2013 for comparison. While it would imply a longer period of low rates, it does not match past ECB decisions as well as the reaction function with SPF forecasts.

This paper analyzes the architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state. By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus under-incentivizes their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical. The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA’s Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States. Joining the SSM as a non-euro area Member State is unattractive because the legal framework grants no voting rights in the ECB’s ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision.

How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, the authors employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. They focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.

This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions.

Credit boom detection methodologies (such as threshold method) lack robustness as they are based on univariate detrending analysis and resort to ratios of credit to real activity.  The author proposes a quantitative indicator to detect atypical behavior of credit from a multivariate system - a monetary VAR. This methodology explicitly accounts for endogenous interactions between credit, asset prices and real activity and detects atypical credit expansions and contractions in the Euro Area, Japan and the U.S. robustly and timely. The analysis also proves useful in real time.

Das Banken- und Versicherungsaufsichtsrecht benennt an mehreren Stellen ausdrücklich gruppenbezogene Pflichten des übergeordneten Unternehmens. Deren Realisierbarkeit hängt von gesellschafts-, insbesondere konzernrechtlichen Schranken ab, die für die Einflussnahme auf nachgeordnete Gruppenunternehmen bestehen. Der vorliegende Beitrag betrachtet das Zusammenspiel von Aufsichts- und Gesellschaftsrecht unter besonderer Berücksichtigung der regelungstragenden Ziele des ersteren. Die Gruppenverantwortung ist in dieser Sicht ein Institut, das zur Verwirklichung eines klar umrissenen, öffentlichen Interesses an der Befolgung bestimmter Normen das übergeordnete Unternehmen als interne Kontrollinstanz in die Pflicht nimmt und mit gruppendimensionalen Handlungspflichten belegt. 
Zur Gewährleistung der Effektivität dieses Instituts ist ein sektoral begrenzter Vorrang der aufsichtsrechtlichen Vorgaben anzuerkennen. Dieser ist durch die angemessene Berücksichtigung des mit dem Aufsichtsrecht verfolgten, öffentlichen Interesses als normativer Determinante der Leitungstätigkeit aller gruppenangehörigen Institute zu verwirklichen.

The authors evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013) and published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. 

In this note, the authors provide an update of the  research that evaluates the current budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, the authors show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. The research makes use of a modern structural model of the economy that in corporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth.

In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.

The authors investigate the comparative properties of empirically-estimated monetary models of the U.S. economy using a new database of models designed for such investigations. They focus on three representative models due to Christiano, Eichenbaum, Evans (2005), Smets and Wouters (2007) and Taylor (1993a). Although these models differ in terms of structure, estimation method, sample period, and data vintage, they find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, optimized monetary policy rules differ across models and lack robustness. Model averaging offers an effective strategy for improving the robustness of policy rules.

Der Aufsatz befasst sich mit dem Krisenmanagement in der EU und den einzelnen Mitgliedsstaaten und der Frage ob die gewährten Unterstützungsmaßnahmen für Banken und Staaten gegen die Arbeitsweise der Europäischen Union (AEUV) verstoßen. Die lange Zeit propagierte Idee der „regulierten Selbstregulierung“ auf Finanzmärkten hat sich als fundamentaler Irrweg erwiesen. Aufsicht und Kontrolle über Finanzmärkte und Finanzinstitute müssen wieder als Aufgabe der Gefahrenabwehr verstanden werden. Es müssen die bewährten polizei- und ordnungsrechtlichen Prinzipien auch wieder im Finanzsektor zur Geltung kommen.

We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lappingdata blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimateof the sectoral factor in comparison with previous literature, which decomposes pricechanges into an aggregate and idiosyncratic component only, and interprets the latter assectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings forthe US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to thesector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.

Policymakers use forecasts to project the consequences of particular policy decisions for certain policy targets. This chapter investigates the use of economic forecasting in policy making by discussing practical examples, providing new empirical evidence and computing forecasts using different macroeconomic models. First, a theoretical framework is presented to differentiate the role of forecasts in simple feedback rules, optimal control policies, and forecast targeting. Then, we review institutional details of the forecasting process at fiscal authorities and central banks. We provide empirical evidence that central bank policy rate decisions in the United States and the Euro area are well described by interest rate rules responding to forecasts of inflation and economic activity rather than recent outcomes. Next, we provide a detailed exposition of methods for producing forecasts. We review forecasting models and provide practical applications. In particular, we illustrate how to use economic structure in interpreting forecasts and how to implement different conditioning assumptions regarding certain planned policy initiatives. Finally, we evaluate the accuracy of central bank and expert forecasts and investigate the interaction between forecasting and policy making by evaluating the performance and robustness of forecast-based policy rules under model uncertainty.

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.

We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution.

This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for - roughly - twice the portion of overall house price changes they explain in OECD countries. We also address crosscountry differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.

Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond nancing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.

In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.

This paper outlines relatively easy to implement reforms for the supervision of transnational banking-groups in the E.U. that should not be primarily based on legal form but on the actual risk structures of the pertinent financial institutions. The proposal also aims at paying close attention to the economics of public administration and international relations in allocating competences among national and supranational supervisory bodies. Before detailing the own proposition, this paper looks into the relationship between sovereign debt and banking crises that drive regulatory reactions to the financial turmoil in the Euro area. These initiatives inter alia affirm effective prudential supervision as a pivotal element of crisis prevention. In order to arrive at a more informed idea, which determinants apart from a perceived appetite for regulatory arbitrage drive banks’ organizational choices, this paper scrutinizes the merits of either a branch or subsidiary structure for the cross-border business of financial institutions. In doing so, it also considers the policy-makers perspective. The analysis shows that no one size fits all organizational structure is available and concludes that banks’ choices should generally not be second-guessed, particularly because they are subject to (some) market discipline. The analysis proceeds with describing and evaluating how competences in prudential supervision are currently allocated among national and supranational supervisory authorities. In order to assess the findings the appraisal adopts insights form the economics of public administration and international relations. It argues that the supervisory architecture has to be more aligned with bureaucrats’ incentives and that inefficient requirements to cooperate and share information should be reduced. Contrary to a widespread perception, shifting responsibility to a supranational authority cannot solve all the problems identified. Resting on these foundations, the last part of this paper finally sketches an alternative solution that dwells on far-reaching mutual recognition of national supervisory regimes and allocates competences in line with supervisors’ incentives and the risk inherent in crossborder banking groups.

I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short-term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.

This chapter aims to provide a hands-on approach to New Keynesian models and their uses for macroeconomic policy analysis. It starts by reviewing the origins of the New Keynesian approach, the key model ingredients and representative models. Building blocks of current-generation dynamic stochastic general equilibrium (DSGE) models are discussed in detail. These models address the famous Lucas critique by deriving behavioral equations systematically from the optimizing and forward-looking decision-making of households and firms subject to well-defined constraints. State-of-the-art methods for solving and estimating such models are reviewed and presented in examples. The chapter goes beyond the mere presentation of the most popular benchmark model by providing a framework for model comparison along with a database that includes a wide variety of macroeconomic models. Thus, it offers a convenient approach for comparing new models to available benchmarks and for investigating whether particular policy recommendations are robust to model uncertainty. Such robustness analysis is illustrated by evaluating the performance of simple monetary policy rules across a range of recently-estimated models including some with financial market imperfections and by reviewing recent comparative findings regarding the magnitude of government spending multipliers. The chapter concludes with a discussion of important objectives for on-going and future research using the New Keynesian framework.

How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the 'competition effect', by which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.18 percent. Most of the cyclical variability in inflation is driven by markup fluctuations due to sticky prices or exogenous shocks rather than endogenous changes in desired markups.

This paper characterises optimal monetary policy in an economy with endogenous firm entry, a cash-in-advance constraint and preset wages. Firms must make profts to cover entry costs; thus the markup on goods prices is efficient. However, because leisure is not priced at a markup, the consumption-leisure tradeoff is distorted. Consequently, the real wage, hours and production are suboptimally low. Due to the labour requirement in entry, insufficient labour supply also implies that entry is too low. The paper shows that in the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks to productivity and entry costs. This raises labour supply, expanding production and firm entry.

In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings.

This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.

Der Aufsatz gibt einen Überblick über das Spektrum der öffentlichen Banken, bestehend aus Sparkassen, Landesbanken, Förderbanken und der Deka. Er zeigt die Besonderheiten von Aufsicht und Kontrolle und gibt Anregungen zur Verbesserung der Kontrolle öffentlicher Banken.

Der Aufsatz skizziert den Weg zur Schaffung einer europäischen Aufsicht, beschreibt das neue Aufsichtssystem, insbesondere den europäischen Ausschuss für Systemrisiken, sowie weitere Aufsichtsbehörden und ordnet dies im Rahmen des Europarechts und des Grundgesetzes ein.

This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors’ information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the likelihood of rare disasters drop to a much more pessimistic level once a disaster has occurred. Such a shift in beliefs can trigger massive declines in pricedividend ratios. Pessimistic beliefs persist for some time. Thus, belief dynamics are a source of apparent excess volatility relative to a rational expectations benchmark. Due to the low frequency of disasters, even an infinitely-lived investor will remain uncertain about the exact probability. Our analysis is conducted in continuous time and offers closed-form solutions for asset prices. We distinguish between rational and adaptive Bayesian learning. Rational learners account for the possibility of future changes in beliefs in determining their demand for risky assets, while adaptive learners take beliefs as given. Thus, risky assets tend to be lower-valued and price-dividend ratios vary less under adaptive versus rational learning for identical priors.